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Can We Dodge Another Market Crisis?

Clearly, no one has forgotten the hog market crash of '98-'99. Pork producers have shown considerable restraint in rebuilding the breeding herd, remarks University of Missouri agricultural economist Glenn Grimes. However, that restraint has nearly been offset by the growth achieved by U.S. productivity gains and large increases in Canadian feeder pig and slaughter hog imports. Those actions, coupled

Clearly, no one has forgotten the hog market crash of '98-'99. Pork producers have shown considerable restraint in rebuilding the breeding herd, remarks University of Missouri agricultural economist Glenn Grimes.

However, that restraint has nearly been offset by the growth achieved by U.S. productivity gains and large increases in Canadian feeder pig and slaughter hog imports.

Those actions, coupled with large pork stocks in inventory (estimated at 31% above a year ago in April), unexpectedly drove hog prices well into the $30s/cwt. this spring.

Positive Signs Evident

Grimes expressed some market optimism as slaughter hog prices crept back to the mid-$30s at the time of his press conference address during World Pork Expo in Des Moines, IA.

Granted, slaughter capacity will be tight heading into the fourth quarter, he says. On the plus side, though, no packing plant is expected to close this year. Chances are good that strong efforts will be made to keep all facilities running at least through this year.

Another positive sign is that unlike 1998, there doesn't appear to be near the momentum for growth in the U.S. pork industry this year, Grimes observes. “Remember, we increased production in '98 around 11% over '97, and that carried over into '99, so that we actually had a larger slaughter in '99 than in '98.”

Grimes is hopeful that slaughter can be kept to his projection of 27.3 million hogs for the fourth quarter. If producer reaction is fast enough, there is population growth and a projected increase in exports, slaughter in 2003 may be held to 100 million head, no larger than in '98, says the long-time Missouri analyst.

Fourth Quarter Prices

Grimes says with minimal slaughter capacity problems, market hogs in the fourth quarter should average $26 to $29 at the terminal markets, and $2 higher for 51-52% lean hogs on the Iowa/southern Minnesota market.

But if fourth quarter production continues the oversupply situation seen this past spring, fourth quarter commercial slaughter will surely cause slaughter capacity problems, he projects.

“If we overrun the numbers in October-December as much as we have in April-May, then we are talking about slaughter numbers at 27.8 million head, about 200,000 head larger than in the fourth quarter of '98,” he explains.

“If that happens, we don't know how low hog prices will go. And if it lasts long enough, it could get to the point that producers would have to pay packers to take their hogs,” Grimes cautions.

In Figure 1, University of Missouri agricultural economist Ron Plain lists supplies and prices for 1998, and compares them with projections for the second half of 2002. His data is based on the assumption that June-December hog slaughter will be 5% above 2001 (hog slaughter has been up over 5% from 2001 for the last nine weeks through mid-June).

Producer Action Needed

First, don't be heroic in efforts to save every pig that is born in the second quarter of the year.

Second, if there are prolonged periods of hot weather, weight gains will be reduced. Take advantage of this, selling lighter slaughter hogs in the third quarter instead of holding them for the fourth quarter.

Market Weight Impact

John Lawrence, Iowa State University agricultural economist, warns that although lowering market weights does reduce supplies, a large number of producers must participate in order to achieve an impact on price.

“A 10-lb. reduction from 265 to 255 lb. is a 3.8% reduction in total pork supply,” he says. “All else equal, we might expect a 10-11% price increase from such a reduction in total pork supply, about $3.50/cwt. in a $35 market.”

However, producers often act in their own self-interest and by what they have control over.

Probing Slaughter Capacity Complications

Thirty years ago, most hog slaughter plants operated on a single-shift basis. When numbers got tight, plants could simply add a shift or a few hours to a shift.

Today, U.S. packing plants don't have that flexibility. They work double shifts six days a week.

“There is very little time in the week to increase capacity,” remarks Jon Caspers, Swaledale, IA, National Pork Producers Council president-elect.

“We tried back in '98 running plants on Sundays, but the problem was if you ran them on Sundays, no-body showed up for work on Mondays,” he says. “So legitimately in this country, there are not a lot of ways to expand capacity.”

Canada, Mexico

Realizing limitations of the U.S. packing industry, producers are looking to their North American trading partners for help.

Caspers is a member of a producer committee that meets with Canadian and Mexican counterparts several times a year to discuss mutual interests. U.S. producers met with Canadian pork leaders at World Pork Expo.

National Pork Producers Council trade lawyer Nick Giordano says both sides are working with their producers and government to avoid a slaughter logjam.

National Pork Board Director of Economics Steve Meyer says Canada may have some flexibility in their slaughter capacity. He says many plants are single shift and operate five days a week. He estimates plant capacity could be increased 10-15% by adding extra weekday hours and some Saturday shifts. Current estimated Canadian slaughter capacity is 438,000 head per five-day work week.

As to why Canadian production is growing at such a rapid rate while U.S. producers have slowed herd growth, Giordano says Canadian producers are trying to add numbers before new environmental regulations are completed. It's the same action U.S. producers took prior to 1998.

Giordano also expressed concern about the impact of subsidies on Canadian hog growth.

Mexico has had an anti-dumping order prohibiting the importation of U.S. market hogs for several years, says Giordano. The order has recently been lifted for regular slaughter hogs, and traders report sending some shipments.

However, Mexican officials have yet to lift the order on lightweight U.S. market hogs. These hogs are valued in Mexico, but heavily discounted in the U.S., he points out. If not resolved soon, the case may be heard before the World Trade Organization.